Murabahah (Markup/Cost-Plus Pricing) is a particular kind of sales where the bank expressly mentions the cost it has incurred on purchase of the Asset(s) and sells it to a customer, by adding some profit.
Terms and Conditions of Murabahah Mode of Financing
The following terms and conditions were set in almost all major Commercial Banks that started the Murabahah mode of financing in their Interest Free Banking Service in Ethiopia while processing the product,
i. The price of goods and Bank's profit on Murabahah Transaction should be fixed and known to both parties at the time of contract. The cost (all direct expenses in acquisition of goods such as invoice price, transportation, L/C charges, marine/in-transit insurance, sales tax etc.) and profit element of the selling price must be separately identified.
ii. In kind exchange/transaction of items of gold, silver or currencies cannot be carried out in Murabahah (markup).
iii. If the bank has appointed the customer as an agent, the purchase of goods by or for and on behalf of the bank and the ultimate sale of such goods to the customer shall all be independent of each other and shall be separately documented.
iv. The purchase invoice issued by the supplier will be in the name of the Bank for Account of XY customer.
v. Immediately after the CRM provided Acknowledgment Letter, the customer shall pay all expenses (Financing Processing and Collateral Estimation Fee and Credit Information Inquiry fee) incurred by the Bank in connection with the negotiation, preparation and execution of the Principal Documents, amendment or extension, granting of any waiver or consent as stated under item 5.4 of this procedure.
vi. A Murabahah contract shall not be rolled-over because the goods once sold by the bank become property of the customer, and, hence, cannot be resold to the same or other banks for the purpose of obtaining further financing.
vii. Early payments by the customer would not result rebate or discount of total profit to be paid as per the original agreement unless the bank allows offering the discount.
viii. If the customer is not able to pay its obligation as per the agreement, the bank may wait a maximum of ninety without charging any extra amount over the original contract price. However, the bank shall charge expenses incurred in relation with financing administration.
ix. For all financing/loans and advances classified as non-performing, the Customer shall initially undertake in a separate agreement to pay a penalty rate of 3% per annum for the entire period of default, calculated on the total amount of the obligations remaining un-discharged
x. The penalty shall not constitute income of the bank. However, the bank has the right to give the penalty to the selected charitable organizations.
xi. Providing insurance cover while acquiring ownership of the goods is the responsibility of Bank. However, the customer may be appointed as agent for this purpose
xii. The customer shall offer acceptable collateral depending on the extent of the risk involved in such financing.
xiii. The mortgagee/bank shall not derive any financial benefit from security offered by the customer unless the security is acquired by the bank.
xiv. In case of a binding promise by the customer, the bank shall take a security deposit /Hamish Jiddiyah/ in form of cash. This security amount is kept in blocked account for confirmation of the financial capacity of the customer and/or to compensate the bank in case of any breach of the customer's binding promise. However, in case of default by the customer, the bank is allowed to adjust the security deposit to extent of the customer's liability.
xv. Any evidence of indebtedness cannot be assigned or transferred on the price different from its face value.
xvi. The settlement of each Murabahah advance shall not exceed a maximum period of 180 days.
xvii. The minimum/floor pricing of a specific financing product shall be set by the bank.
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